The Day Ahead: The 'Art of War' Investment Guide

 | Sep 28, 2012 | 8:30 AM EDT  | Comments
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Stock quotes in this article:

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tgt

Father Time is brutal and ugly, he will sneak up on you without any advanced notice. Such was the case as I realized the label on the Art of War paperback that I have reread consistently said: "Borders $7.95." What a wonderful reminder that in the end, the advancement of technology will likely cause Staples (SPLs) to close more stores than it has admitted to investors and that RadioShack (RSH) truly has no place in modern retailing. Within the Art of War, there is a quote that applies perfectly to investing amid all of the daily helpings of tomfoolery.

Master Sun: "The contour of the land is an aid to an army: sizing up opponents to determine victory, assessing dangers and distances, is the proper course of action for military leaders. Those who battle knowing these will win; those who do battle without knowing will lose."

Not to be overly dramatic, but you are the military leader of the portfolio of stocks you own. Along with the constant requirement of surveying the landscape of digitally fed macro data and then synthesizing the opinions of the machines and humans, both representing opponents, there is a search for fresh ideas. I have this funny feeling that after the market traded higher on Thursday following days of heading lower, there was a sense the boat may be leaving the dock again. Summer rally back on? This is the name of the game in investing -- reading of an up session for markets on an iPhone app creates excitement. Gone is the excitement of finding a line in a 10-Q that gives hope about a company's quarter and then discovering through rigorous, weekend-ruining research that the valuation prices in none of that hope.

I understand the game and have been watching a true evolution in the investing process from the moment I scored my first gig on the Street one week out of college. Do I think this is OK? No, but that is the old school training housed in my brain. The new school in me builds investment logs every day as opposed to developing four new multi-factor models by the sound of the closing bell.

I leave you with these bullet points about how to buy a stock today in a Master Sun type montage of market thoughts to ponder during the weekend.

Bet on These Three Macro Adages:

  1. ISM-manufacturing (Monday) delivers a modest rebound from the horrendous August showing and that recharges bulls based on pockets of life in regional manufacturing reports (employment and new orders) this week.
  2. August employment report represented the bottom in the cycle soft patch.
  3. Pertaining to China's stimulus ambitions, where there is smoke, there is fire.

Also Bet on These Five Market Interpretations of Data:

  1. Anemic growth = no inflation = support for more Fed accommodation beyond the $40 billion or so already being stuffed into the system.
  2. The notion of the market being oversold turns to one of opportunistic valuations, where hot sectors return to the good graces of the masses (financials, homebuilders, consumer discretionary).
  3. Earnings warnings, given the return of euphoria, are largely ignored, which was counter to the reactions to Norfolk Southern (NSC) and Caterpillar (CAT).
  4. EU debt risk flare recedes to the background again as the market overlooks the fact that although Spain is focusing on spending cuts instead of tax increases, there is still an issue of a structural growth headwind that causes recoupling.
  5. The downward revisions to second quarter GDP and durable goods were backward looking and unreflective of the direction of the economy in the fourth quarter.

Color me silly, but the hurdle rate to get long is rather high. I think the market has to hand over a few conclusive tells (and then we can bet on a couple of the items listed above, just on cheaper valuations), so in the meanwhile it's okay to err on the side of caution.

Crystal Ball

September same-store sales will be released next Thursday, and the retail sector is acting weaker than the broader market. A name that stands out in this regard is Target (TGT). There could be a disappointment factor lurking in the form of demand pull forward into August. I have liked how TJ Maxx (TJX) has traded compared to its peer group in the latter half of the week; confident the company will not be in the mix of retailers swept into any negative backstories that could develop from the day.

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